News Story

Pension Costs Mean Tighter Budgets For Classrooms, Taxpayers

MPSERS has unfunded liability of $24.3 billion

Randy Liepa, superintendent of the Livonia Public Schools, says his district will pay just under $30 million this year for its pension and health care costs.

The district has to spend the money to cover the costs of the state retirement benefits plan, which has an estimated unfunded liability of $24.3 billion.

Just for Livonia Public Schools' employees, the state of Michigan is chipping in another $6.4 million to cover the costs of the Michigan Public School Employees Retirement System (MPSERS) for 2013-14.

The teacher pension system has become an issue in the ongoing debate over state funding. Many school administrators, union officials and politicians don't want to recognize it as part of state funding because it isn't part of the per-pupil foundation allowance that schools receive to pay for day-to-day operations.

The skyrocketing cost for the pension system shows how K-12 spending is increasing while also tightening the budget for other classroom costs.

"I do not want to gloss over the help retirement reform provided to local school districts," Liepa said in an email. "We recognize that without the reform packages passed by the Legislature in recent years, our budgets would have been even worse off. School administrators had been asking for retirement-cost reform in our legislative platform for several years, and we applaud the state Legislature for addressing the issue."

The state put in some complex reforms in 2012 that included greater employee contributions and allowing new hires to choose a 401(k)-type plan in lieu of the traditional annual pension. That lowered the MPSERS unfunded liability by $561 million in 2013.

"I can go back to the late 1990s when school officials began to discuss the retirement system and its costs to local school districts," Liepa said. " … The Legislature has taken on retirement reforms. This will, in the long run, be financially helpful to school districts and will make the system work for employees. In the short term, the state is holding our retirement costs to current levels through the reforms."

The real long-term solution is to close MPSERS, said James Hohman, assistant director of fiscal policy at the Mackinac Center for Public Policy. In its place, he added, the state should get all school employees on a 401(k)-type plan where the obligations of employers are are calculated and paid on an annual basis, in the form of contributions to personal accounts. 

"The defined benefit pension plan has become too expensive," Hohman said. "Retirement benefits in the private sector cost 5 percent to 7 percent (of payroll). MPSERS costs roughly 30 percent of payroll and the contributions are neither predictable, affordable nor current. That is, there are large gaps between what they've set aside to pay for pensions and what they expect it costs. … The recent retirement reforms do little to make the pension system more predictable, affordable or current. Superintendents should call for the system to be closed, but instead have only applauded tinkering with contribution rates."

Beginning in 1997, all new state employees except teachers were shifted away from the pension system. In 2012, the Michigan Senate passed a bill that would  have shifted teachers to a defined contribution plan, but the Republican-led Michigan House killed the bill.


See also:

Advocates of More Education Spending Ignoring Billions In Other Funds

The $2 Billion Education Funding Myth

Reality Check: Michigan Public Schools Getting More Money For Fewer Students

Michigan Schools Never Saw a $1 Billion Cut

Despite Fewer Students, Michigan School Funding Going Up, Up, Up

Michigan School Districts In Perpetual 'Funding Crisis'

Commentary: Shifting School Employees To a 401(k) Is the Most Important Thing

Teacher Pension System Hole Getting Deeper

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.